Many of my clients tell me they especially value having their own broker overseeing the process, and letting them know what to expect. The real estate process — especially to first-time buyers — can seem like a roller coaster ride. What comes next: A sudden, steep downhill roll, getting whipped around the curve? Having a overview of the process, as well as an explanation for what is happening right now can reduce stress.
The Process Begins
It is hard to say just when the process begins, in the sense that it really begins way before the first telephone call to a real estate agent or banker. Maybe you have thought about homebuying for a long time, maybe you look at real estate ads and occasionally visit an open house. Sometimes gradually, sometimes quite quickly, the idea of homebuying becomes more serious, and at some point, perhaps you decide you need to talk with someone, but whom?
Whom Do You Call?
Whom should you call first…a real estate agent or a mortgage lender? What is the point of calling an agent and seeing houses until you know that you can actually buy one? But why talk with a lender until you know that whether there are suitable houses for you being offered for sale. And which banker should you call? Which real estate agent?
Calling a banker first is something that a reasonable person making a sensible decision could very well do, and so is calling a real estate agent. Either way can work out fine. My own personal bias is that it is often better to call a competent Realtor. The reason I feel that way is that a banker will usually try to fit you in with one of the mortgage products offered by his or her bank. Rarely have I heard of a banker telling a potential customer: “We can offer you a mortgage, but, truthfully, the bank down the street has a type of mortgage which we do not have which would be much better for your situation.” Occasionally it happens, but don’t count on it.
When a buyer calls me and asks about financing, at that point, since I am not his or her representative, I may give them names and telephone numbers of 3 or 4 bankers whom I believe to be competent, and I might also give some information about financing real estate purchases. Once someone becomes my client, and I am working for them, it becomes appropriate for me to take a more active role. At that point, I can do some of the “leg work” making telephone calls, explaining special circumstances, shopping for the right mortgage. When more than one mortgage might work, I help my client to understand and compare the pros and cons of each so that s/he can weigh the trade-offs and make his or her best decision.
Agency Relationship Disclosure
In Vermont and New Hampshire, a real estate agent is required to give a buyer or a seller a written disclosure of agency status at the first significant contact, and ask you to sign. This document is not a contract, and by signing you are only acknowledging that you have received it, and read it. So, if you have visited a listing agent and signed something, and are not certain whether or not you have an obligation, it may be that what you signed is this Disclosure, and that you have no contract. You should receive a copy of any document you sign, but if you are uncertain, you can call the agent and find out what you signed, and ask them to mail you a copy of it.
You Have Choices
You have a right to be represented, or not to be represented in a real estate transaction. For listed property, you can work with the seller’s agent or with a real estate licensee who represents the seller’s agent (in Vermont this is called a broker’s broker). In New Hampshire you can work with a seller’s subagent. A seller’s subagent would be a licensee who has been delegated authority by the seller’s agent to act also as the seller’s agent. With unlisted property, such as a for-sale-by-owner, you can avoid licensees altogether by approaching the seller directly, but you would be interfering with a business relationship is you were to approach a seller directly who is exclusively represented by an agent. You can go to a full-service firm (a firm which represents both buyers and sellers) and sign a right to represent buyer with them. Problem is, what happens if you then become interested in one of that agency’s own listings? Since the firm itself is the agent, not the individual licensees, there is an inherent conflict of interest when the same firm is representing the seller of a particular property and also a buyer who is interested in that property. One solution is the “bump” one of the clients (usually the buyer) in which case the firm would continue to represent the other client (usually the seller) and the “bumped” client would become a customer, and would not longer be represented by an agent who is loyal to the buyer’s best interests. Or, in New Hampshire, with the knowledge and consent of both buyer and seller, the real estate firm can practice disclosed dual agency, and continue to represent both…certainly an uncomfortable situation for all concerned. Vermont does not allow dual agency, but does allow “limited agency” which in the opinion of many broker’s, including myself, is just another name for disclosed dual agency. In the potential dual agency situation, the buyer does have the right to walk out the door and seek representation by another firm, but this is a situation that the original firm is not fond of, and, of course, it means starting from scratch with a new agent.
The explanations of the choices available sound complicated, and, in fact, many licensees admit that they are confused. Eventually it is possible that there will be rule changes simplifying the choices and improving practice.
Choosing An Exclusive Buyer’s Agent
An Exclusive Buyer’s Agent (an EBA) represents buyers only, never sellers or seller’s agents, and is always a single agent, never a dual or “limited” agent. Although every licensee has the right to practice any legal form of representation, the office policy of Brattleboro Buyer Brokerage Real Estate is to practice as an exclusive buyer’s agent only. There may be some confusion about the meaning of exclusive, since any licensee, including those working in full-service agencies which emphasize taking listings and represent sellers, can and often do enter into exclusive right to represent buyer agreements. But, as explained above, the “exclusive” agreements can be dropped or transformed into dual or “limited” agency if you should become interested in a property listed by that agency. Since Brattleboro Buyer Brokerage never takes listings, never represents sellers or seller’s agents, we are a true Exclusive Buyer’s Agent. The only possible conflict of interest that we do have is if we are representing two buyers who are both interested in the same property. In such a case, our office policy to disclose this to both buyers as soon as both of them get beyond the looking stage and express an interest in purchasing the property, and then, we would continue to represent the client who first makes an offer on the property, and we would refer the other client out to another agency. Since the March, 1996 start of Brattleboro Buyer Brokerage, to date, this situation has not occurred, even once. Prior to that, while working at a large agency, it did occur one time; I referred out the second buyer, who made an offer through another firm, and prevailed. No compensation for me in that case, but I did have the satisfaction of knowing that things were done the best way possible.
Retaining a Buyer’s Agent
In Vermont and in New Hampshire, in order for a real estate licensee to become your agent, you must enter into a written right to represent buyer agreement. This is a mirror image of a listing agreement: A listing agreement is a brokerage agreement for a seller; a right to represent buyer agreement is a brokerage agreement for a buyer. A listing agreement makes the real estate firm an agent for the seller; a right to represent buyer agreement makes the real estate firm an agent for the buyer.
There are exclusive brokerage agreements and non-exclusive brokerage agreements. A non-exclusive brokerage agreement would allow the buyer or the seller to use more than one agent. At Brattleboro Buyer Brokerage we rarely enter into a non-exclusive right to represent agreement, and only in very unusual circumstances. By entering into an agreement which makes Brattleboro Buyer Brokerage your sole and exclusive agent, you give up the right to call other real estate agents; in return, instead of being on 4 or 5 back burner, you are only on one front burner. The buyer who asks 4 or 5 agents to send them listing sheets, actually ends up as one more name on an 4 or 5 index cards. When a real estate agents has collected a hundred or so such cards, it becomes impossible for him or her to give each of them quick and effective service. As your exclusive agent, we are responsible for conducting complete, systematic property searches and updates. In a market which has become increasingly competitive for buyers; having one, competent and motivated broker working diligently for you can be an significant advantage.
Initially Brattleboro Buyer Brokerage will conduct a complete property search for anyone who asks. It is our way of demonstrating our service. Then, if you want to continue, we can enter into an agency relationship, an exclusive right to represent. Many buyers have told me that when they first call an ordinary agent, he or she is attentive, returns calls, and sends listing sheets. Later, after 3 or 4 weeks, fewer listing sheets come, it takes longer for the agent to return calls, and sometimes messages are ignored. Why? Because when you call an ordinary agent who is focused on selling his or her listings, you are not a client, you are a lead. The phone rings, it is a lead. The phone rings again…another lead. And another, and another. At Brattleboro Buyer Brokerage we have found objective ways to prioritize so that our focus is on a smaller number of clients. In entering into an exclusive right to represent, we accept a small retainer. When you purchase a property, we return the retainer to you and our compensation comes through the transaction, usually as a co-broker commission-split with the listing agency. The retainer is guaranteed to your satisfaction, so that, if for any reason or for no reason, if you were to tell us that you are not satisfied with our service, we would return the retainer in full immediately, no questions, and terminate the agency relationship. However, if you are satisfied that we have performed diligently, but, for some reason you have changed your mind and decided not to pursue a real estate purchase, then we would keep the retainer as compensation for time and effort spent. Obviously someone who likes driving around on weekends with a Realtor is not going to write out a retainer check. This system gives us an objective basis upon which to decide who gets our attention and gives the serious buyer a way to obtain the professional care they desire and deserve.
Finding the Right Property
Now that you have retained your own, exclusive buyer’s broker, the search begins in earnest. Now, instead of calling on ads here and there, and receiving a handful of listing sheets here and there, together we select objective search criteria and let the computer find every listing which fits those criteria. For a county-wide land search, we might come up with over 100 listings. For a house search in several towns — say within a half hour of Brattleboro — we may come up with 20 or 30. (We may already have done this initial search before you became a client.) To this initial search, we add updates as new listings come out fitting the search criteria. The trick at this stage is to discern which listings we can safely eliminate (not throwing out the baby with the bath water) so that we can get a shorter list without necessarily visiting every single property which came up on the initial search. If you do not want to be located on a route, for example, we can safely eliminate all properties on routes. As your broker, I can make inquiries, and get information on particular properties which may not be on the listing sheet. In addition to using the MLS, I also keep track of for-sale-by-owner properties, and sometimes, through the “grapevine” I hear about an available property which has not been listed or advertised.
Once we have shortened the list by prudent elimination, we go and view property. When there are a lot of land listings to view, I generally let the client visit each parcel without me, until they have zeroed in on a smaller number, and then I go see them. After all, you do not need a key to see land. With houses, I make appointments. If there are a lot, with careful planning, we can visit quite a few in an afternoon or morning, and an allay marathon is possible if you are up for it. The idea is to see every property on your list as quickly as possible; we can always come back for a longer, second look if you should develop a serious interest in certain properties. We want you to have seen them all quickly because if you see a house which you really like and would consider buying, you probably would not want to hesitate and risk losing that house to a competing buyer simply because there are still two or three houses that you have not yet seen, and will not be able to see until next week. The sooner you know what the comparisons are, the better position you are in to make comparisons and to feel confident in your ability to make a sound choice.
Getting the Property Under Contract
Making an Offer
In Vermont and New Hampshire, real estate agents are required to convey all offers — whether written or verbal — to the seller. I can call the seller’s agent and say: “My client wants to offer $160,000 for the Jones property,” and that listing agent is required to convey that offer to his or her client, the seller. In most instances, in reply to a verbal offer, the listing agent is likely to say something like the following: “I will convey that verbal offer to my client since I am required to convey all offers, but I will advise my client not to respond until we receive a written offer with a deposit check attached.” As a matter of practice, once a written offer has been made, then the seller’s agent will usually be convince that your intentions are serious, and, if your initial offer is not accepted, we can have a back-and-forth verbal discussion until there is a meeting of minds, and then write up a purchase contract in it’s final form.
How is a written offer made?
In Vermont and New Hampshire, the general practice in residential realestate is for the buyer to sign a purchase & sale contract form, whichhas been filled out with terms and conditions which the buyer isproposing. We attach a deposit check, and then, as your agent, I wouldpresent the offer to the seller’s agent or directly to the seller if itis a for-sale-by-owner. Typically the deposit is held in the listingagent’s escrow account. With a for-sale-by-owner property, the depositis generally held in the seller’s attorney’s trust account.
It is a good idea to write in a clause making the offer and anysubsequent addenda subject to review by the buyer’s attorney and by theseller’s attorney within a certain period of time. This protects bothparties from legal errors, and when we are dealing with afor-sale-by-owner, it protects us from any potential charge that we tookadvantage of a vulnerable person.
How Much to Offer
If possible, the seller would want to get more than the fair market value of her or his property, and the buyer would like to steal it cheap. Often a seller will over-price the property hoping that the “random nut” with more money than sense will wander along, fall in love with the house, pay full price. Of course, even if he does appear, this random nut had better pay cash, because if he is financing with 20% or less down, the bank’s appraisal will probably come in way below the contract price, and the bank will refuse to approve the mortgage. Although the random nut scenario may actually happen occasionally, it is more usually that over-pricing a home will just drive potential buyers away, and, with time, a truly motivated seller will become more realistic and adjust the price. It is not uncommon for a seller to reject an offer which is made during the first month that the house is on the market, only to accept an even lower offer a year later.
The best hope of coming to a meeting of minds and putting together a solid agreement is to determine fair market value for the property.
What is fair market value:
According the Black’s Law Dictionary — 6th edition (in part):
Fair Market Value: The amount at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts.
So, in determining fair market value, we are really trying to predict what the market would say, if given a chance. In reality, there is no single price-point which is the precise fair market value, but rather a range. In residential real estate, we use data from recently sold comparable properties, and also compare the subject property with similar competing properties, currently on the market. Since most property in Vermont and New Hampshire is unique — not cookie-cutter other than condos — we often have to make adjustments. If we find two properties in the same town, which are very similar, but one has a garage and the other does not, we would adjust up in price for the one with the garage, down for the other. As your broker, part of my job would be to provide access to market information which would give you a context for determining what price to offer. I also research the public record to find out, among other things, when the current owner purchased the house, how much s/he paid, and also whether there is a mortgage, and for how much. Using this information, we can often calculate with a great deal of accuracy the seller’s break-even price; the price at which the seller would have to bring additional money to the closing table; and how much cash the seller will net at various price points.
Deposits
“Earnest money” or a deposit check is included with the offer. This deposit is the buyer’s money, but it is put in escrow to indemnify the seller for harm if the buyer defaults on contractual obligations. Of course there are no contractual obligations until the buyer and seller have both signed the same contract. If the seller does accept, usually a heftier second deposit is to be added within a specified time. The deposit is your money, held in someone else’s pocket and returned to you either at closing, or when you terminate the contract because a contingency is unsatisfied or because of a seller’s inability to perform (such as an unresolved title problem). The real estate commissions in both Vermont and New Hampshire are very sensitive to the handling of escrow money, and fooling with an escrow account would seriously jeopardize a broker’s license. In the event of a dispute, all deposit monies are to be deposited into a court of jurisdiction: the broker holding the escrow has absolutely no authority to award the deposit to the seller. The only grounds by which a buyer can lose his or her deposit, is because of defaulting on contractual obligations. If you must terminate the contract because a contingency has not been satisfied, you are entitled to get back your deposit. So, if you must terminate the transaction because, despite applying, you were denied financing of the type specified in the purchase & sale contract, then you are entitled to the prompt return of your total deposit. If the inspection contingency is not satisfied because a hidden material defect, not previously known or disclosed significantly affects the value of the home as agreed to in the purchase price, and you are unable to re-negotiate a mutually agreeable resolution, then you are entitled to the return of your deposit.
Protecting Your Deposit
To date, none of my clients has ever forfeited a deposit. So long as we calendar all deadlines, make certain to follow through on all of your contractual obligations, and make timely, properly-served, and properly-worded notification whenever needed, your deposit should remain safe. In addition, I recommend to my clients that they retain an attorney early on in the process. Before serving a notification — for example a notification that the inspection contingency has not been satisfied — I recommend to my clients that we have the notification reviewed by the buyer’s attorney in order to be certain that it is worded to be effective. That way, in the event of a dispute, we have a lawyer’s clout on our side. Since the deposit is to indemnify the seller against actual loss caused by a buyer’s default, as a technical matter, you could still dispute a seller’s right to keep your deposit even if you did default in your obligations: The grounds for the dispute would be that, despite your default, the seller cannot prove actual loss. Of course, I do not recommend getting into unnecessary arguing contests, which should not be necessary so long as we monitor the contract so that you have fulfilled your obligations. Unfortunately, I am aware of a number of cases in which unrepresented buyers have lost large sums of money through forfeited deposits.
Terms and Conditions
The devil can be in the details, and price alone is only one detail. There are all kinds of special circumstances which necessitate special contract language. Suppose tenants have to be notified: How will that be timed? Suppose the sale is contingent upon the seller finding suitable housing prior to closing: What protections will the buyer have? How can the contract be written to convince the seller that the buyer is financially strong and reliable, so that the seller will accept your offer rather than that of a competing buyer? Will your offer be presented by a broker who has a reputation for putting together solid transactions?
Buying Land
Land transactions present special challenges: You do not simply want to purchase a piece of land, you want to be reasonably sure that you will be able to do what you intend to do with the land. A contingency that soil tests will determine that a septic system for a three bedroom home may sound like it will protect you, but suppose that septic system will be a $20,000 mound? Shouldn’t you have some language limiting the estimated cost? In Vermont, some land has been subdivided with a stipulation that it will not be used as a building lot, it is called a deferral of permit. In order to build, this deferral must be lifted. There are cases in which the deferral is not mentioned on the listing sheet, and, through error, the lot is listed as a building lot. Such a lot may very well pass the soil test contingency, but still it will not be a building lot until the deferral is removed, a process which usually takes 90 days, plus or minus. If you were to close on such a property, and then apply for a building permit, you could be in for a surprise which would upset your plans. Investigations by a buyer’s agent and protective contract language can be a significant benefit for you.
Negotiations Are Successful: You Have a House Under Contract. What Happens Now?
Finding the right home (or land, or commercial property) and getting it under contract is half the battle; continuing the transaction to a safe and successful conclusion is the other half. In most cases, that means keeping everything on track until closing. Occasionally, however a safe conclusion can mean killing the deal and having your deposit returned.
There is no way to write a one-size-fits-all, contract-to-closing checklist. While real estate transactions tend to share common elements, your own transaction may be unique in some significant way. Even when a transaction seems to be “garden variety,” unexpected challenges can emerge. Delays are possible. Proactive anticipation of potential problems can usually prevent delays. That is why we urge buyer who plan to finance to shop for their mortgage, and apply for a pre-approval early on, even before they find the home they want, so that they can resolve any financing snags in advance.
The etymological roots of the word “contract” mean drawn together. Therefore the contract is an agreement which draws you, the buyer, together with the seller. Buyer and seller are drawn together by the Purchase & Sale Contract which expresses their mutual intentions to complete the the transfer of the property. As an instrument of these intentions, the Contract spells out the obligations of the buyer and the obligations of the seller. While the thrust of the Contract is directed at completing a transaction, since things do not always work out, the contract also governs the manner is which the contract may be terminated.
Legal Representation
Brattleboro Buyer Brokerage strongly recommends enlisting a lawyer to represent you in the transaction, and to do so as early as possible. In case of any differences of opinion which may develop about the interpretation of your rights and obligations under the contract, having a legal advocate will be to your advantage. You may already have an attorney whom you regularly rely upon. Or, as your broker, I can make recommendations.
Deadlines and Critical Dates
There are usually a number of specific deadlines in a Purchase & Sale Contract, and there are generally critical dates which are implied, even if not spelled out. These dates are critical because missing them can have serious consequences. Let’s go over the deadlines in your contract:
- Loan Application
- You must submit a complete loan application with _____ calendar days of seller’s acceptance of your offer.
Seller’s acceptance was on ______ Apply for loan by ______. - Second Deposit
- Date _________ Amount _________
- Inspections
- To be completed by ___________
- Notify Seller
- To renegotiate or terminate contract based on inspection results, by: _______
- Mortgage commitment deadline
- ___________ (Vermont Realtor Purchase & Sale Contract form gives you three business days to notify seller if you cannot meet commitment deadline.)
- Obtain Fire & Hazard Insurance
- Before Closing date. (This is required by mortgage lenders; it is prudent for every home owner.)
- Walk-Through
- Within 24 hours before closing. (Usually we schedule the walk-through an hour before closing.) The purpose is to make sure that the premises have been left broom-clean and free of occupants, as specified in the Contract.
Notifications
To be effective, all notifications must be made in the manner specified in the Contract, and should be properly worded. To do otherwise can jeopardize your deposit. For example: If, despite our best efforts, the mortgage commitment is delayed, a phone call or even a note from your agent to the seller’s agent will not protect you. The Vermont Realtor Purchase & Sale form specifies written notification directly from the buyer to the seller. I recommend using Certified Mail with return receipt. We must consult with your attorney for proper wording. The tone of the notification can be friendly, it is just important that we make certain that it is effective.
Giving Notice to Vacate Current Rental
You should check your lease or rental agreement in order to be certain about the requirements for giving notice to vacate. Usually the notification period coincides with the rental period. In other words, if you are supposed to give 30 days notice, and your rental period starts on the first of each month, then a notice given on the 15th actually starts on the first of the following month. There is some risk in giving notice 30 days before the scheduled closing date. A last-minute glitch may occur. If you have a good relationship with the building owner from whom you currently rent, and can discuss it with him or her, it may be possible that you will be able to get an advance guarantee that you will continue to be able to rent in case something goes wrong. Otherwise, giving notice after the closing may be an idea worthy of consideration. Eliminating the risk may be worth the cost of an extra month’s rent. Also, having a one-month overlap might make moving less frantic.
Title Insurance
Title Insurance can be purchased for a one-time fee. While it is highly unlikely that you will ever have to defend your title to the property, if it ever does happen, the title insurance company will provide the lawyer, and, should you lose, the title insurance company will be obligated to compensate you for the loss of the property. Most mortgage lenders require that you pay for enough title insurance to cover their interest in the property, and this broker considers it advisable for a buyer to have the entire value of the property covered by title insurance. Title insurance can either be purchased from an insurance company, or directly from your attorney.
Cash Needed at Closing
How much money should you bring to closing? Basically you will need enough money to cover your down payment plus closing costs, prepaids, and tax & fuel pro rations if you are financing, or the full purchase price plus closing cost & incidental costs if you are paying cash. Your deposit, which has been held in escrow, will be returned to you to be applied to your costs at closing. When you first apply for a mortgage, the lender should provide you with a Good Faith Estimate showing approximately how much you will need for closing costs. Closing costs cannot be calculated precisely until the last minute, because they include last-minute adjustments. A day or two before closing, your attorney will tell you how much to bring in certified funds. Often, for one reason or another, there are final adjustments right at the closing table. You may end up being being given a small check or being asked to write one. Therefore you should bring your checkbook as well as the bank check.
The Closing
If all goes well, as it usually does, the closing should be uneventful. Your attorney will have a pile of papers for your signature, which he or she will explain to you. Closings usually take about an hour-and-a-half. You can expect to leave with the keys to your new home.